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5 Steps to Detect and Prevent Fraud in Customer Loyalty Programs

5 Steps to Detect and Prevent Fraud in Customer Loyalty Programs

Customer loyalty programs have become an increasingly popular and effective method of retaining customers. In the digital age, especially with the arrival of artificial intelligence (AI), programs and their loyal customers have also become a target for fraudsters. A study conducted by the Association of Certified Fraud Examiners revealed that loyalty programs within the United States suffered an estimated $1 billion in losses due to fraud in 2020 alone [1].

Fraud in customer loyalty programs costs businesses financially, undermines trust and can damage customer relationships. Profitable, lifelong customer relationships are built on trust, so the threat of fraud is a genuine concern. Detecting and preventing fraud is vital for brands today. Not to mention recovering losses and rebuilding trust after fraud occurs.

Why does customer loyalty program fraud happen and why must businesses detect and prevent it? We’ll discuss this in the following sections and provide 5 steps businesses can include in their strategy to build a solid defense against fraud in their customer loyalty programs.

Both small businesses and multinational corporations are susceptible to loyalty program fraud. Several types of fraud frequently affect customer loyalty programs, including but not limited to gaming the system, identity theft and account takeovers.

When “gaming the system,” fraudsters manipulate program rules to earn or redeem rewards illegitimately. For instance, a report by Forrester showed that in many casino gaming-based loyalty programs, fraudsters could use bots to simulate game-playing behaviors, thereby earning rewards unfairly.

Identity theft involves fraudsters stealing someone’s personal information to participate in a loyalty program. In account takeover fraud, they target existing loyalty accounts. According to a study by NuData Security, these account takeovers led to an 89% increase in fraud losses from loyalty programs in 2018.

Here are the 5 steps to detect and prevent fraud in customer loyalty programs.

Maintaining a secure database is crucial to prevent loyalty program fraud. Every piece of customer data collected serves as a potential entry point for fraudsters. Protecting such information should be a top priority.

Using robust security protocols helps. For instance, use multi-factor authentication to secure user data on its rewards app. This approach prompts users for additional proof of identity besides their password, deterring unauthorized access.

Encrypting sensitive data further reinforces security. Encryption converts data into a code, minimizing the risk of unauthorized access should the system be compromised. Companies like IBM implement such methods to protect their customer data.

Loyalty programs should also comply with the most up-to-date security standards. The Payment Card Industry Data Security Standard (PCI DSS) [2], for example, outlines necessary measures for businesses that process card payments. They aim to mitigate the theft of customers’ card data.

An example of PCI DSS security measures is that a merchant or the merchant’s payment processor cannot store cardholder data (CHD) and sensitive authentication data (SAD). Any entity accepting credit card payments holding that data must use encryption, masking, hashing and truncation to safeguard it.

A single data breach can significantly erode customer trust. Companies must invest in robust security measures to maintain customer relationships and the integrity of their loyalty program.

The health of a loyalty program depends on regular oversight. Companies need to frequently analyze the operations of loyalty programs to identify unusual patterns. An uptick in single-use accounts, for instance, can indicate fraudulent behavior.

A View from the Wing report showed that United Airlines had trouble with fraud in 2014 [5]. The company’s response included strengthening the analysis of frequent flyer accounts and transactions. The increased vigilance led to a marked reduction in fraudulent activities.

Another good example comes from the retail sector. Nordstrom’s loyalty program faced account takeovers. To combat this, Nordstrom increased monitoring mechanisms such as tracking and analyzing redemption patterns. As a direct result, the retailer made significant strides in preventing further fraudulent actions.

Frequent and thorough reviews of program activities are essential. Maintain detailed logs of transactions, monitor account activities closely and look for patterns that deviate from the norm. Companies are better equipped to identify, prevent, and address fraud by proactively monitoring and auditing their loyalty programs.

With technology evolving, companies are leveraging AI and other tools to strengthen their fight against loyalty program fraud. Implementing innovative fraud detection tools is vital in enhancing customer loyalty program security.

Advanced software solutions offer features such as machine learning and predictive analytics. These tools can detect suspicious patterns and activities within the vast range of customer data, informing you of potentially fraudulent actions.

Riskified, an e-commerce fraud prevention company, successfully utilizes this technology [3]. With a fraud detection rate of over 80%, the company has shown how artificial intelligence can effectively pinpoint fraudulent actions in real time, providing ample opportunities for timely intervention.

Adopting advanced fraud detection technology doesn’t just combat current threats, it also positions companies for future, increasingly sophisticated fraud attempts. By investing in these solutions, companies can defend themselves and their loyal customers proactively against fraudulent activities.

Educating customers is crucial in preventing fraud. It’s critical to provide clients with tools to inform their customers about common fraud tactics, the importance of maintaining robust, unique passwords [7], the importance of two-factor authentication and provide reporting mechanisms to empower customers in reporting fraud.

We always advocate that our clients develop systems that recommend their customers never share personal information. Encourage customers not to share their account details, especially passwords, and advise caution when handling communications claiming to be from your company. Best Western’s Reward Rush program has done a commendable job at this, employing a comprehensive customer education approach.

Transparency enhances trust. Companies should provide customers with up-to-date information about any security updates or breaches. Amazon Prime does a great job of enhancing trust with its loyal customers. They notify subscribers regularly about their account security and ask for two-factor authentication when customers log in.

Companies should also facilitate convenient reporting mechanisms. If customers suspect fraudulent activities, it should be easy for them to report their concerns.

These strategies nurture a protective loyalty program environment where customers can become allies against fraud. After all, an informed customer is a secure customer.

When a loyalty program fraud case occurs, reactions must be swift and effective. Companies can protect their reputation and shield their customers from potential losses by creating and maintaining effective response strategies.

An effective response plan includes but is not limited to, immediately notifying customers potentially affected by the fraud. It should also involve the appropriate legal channels, if necessary. Communication with customers in these instances should be transparent, helping them understand the situation and the steps taken to resolve it.

Partnering with a trusted loyalty marketing agency is the key to building a fraud-proof customer loyalty program.

According to Vasiliadis & Zafiropoulos, trust is a key element in creating successful loyalty programs [4]. Engaging customers requires rewards, good service and a safe and secure platform. Trusted loyalty marketing agencies help businesses create and manage this effectively.

The following are key takeaways when creating customer loyalty programs to prevent fraud.

  • Integrating robust data security practices can help protect customer loyalty programs. Layered protection of customer information thwarts common fraud types.
  • Regularly monitoring and auditing loyalty program activity is crucial and can flag suspicious behavior early.
  • Implementing advanced fraud detection technology also assists. These tools use machine learning to identify complex fraud patterns.
  • Keeping customers informed is another layer of defense. They can help by securing their personal loyalty accounts.
  • Maintaining an effective response plan is vital. Case studies show businesses that recovered quickly from fraud had comprehensive plans.

Working with a loyalty marketing agency like Ascendant Loyalty can help your company design a loyalty program that safeguards your customers and company from fraudulent activity. Get in touch with us to find out how.


[1] Association of Certified Fraud Examiners. (2020)

[2] PCISS Security Standards Council. (2018)

[3] “Preventing Loyalty Rewards Program Fraud”. FBI (2020).

[4] Leff, G. (2014). Award Booking Fraud is a Big Problem – Especially for Air Canada & [5] United. View from the Wing.

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